It's time to end Dabba trading

September 02, 2010 16:25 IST

A parallel system of futures trading in commodities, operating outside recognised commodity exchanges, better known by its colloquial epithet Dabba, has been thriving unchecked and is believed to be now generating bigger trading volumes than the regular exchanges.

This is chiefly because curbing this mode of trading is proving difficult under existing rules governing commodity futures. The Forward Markets Commission (FMC), the main regulator of this sector, in its present avatar does not have adequate powers to directly intervene in Dabba trading.

Nor can the commodity exchanges do much to stop it, though the Dabba operators are known to be using the prices discovered at the exchanges to settle their unwritten deals. Couple of indirect measures taken recently by the FMC, such as imposition of a relatively more deterrent penalty regime for erring brokers and barring sub-brokers from commodity trading, seem to aim, in part, at thwarting the Dabba operations, but they have failed to stop the racket.

The FMC has now sought information on inactive members of commodity exchanges in the belief that many of them may be involved in this illegal business. It remains to be seen if a mere weeding out of inactive members would stop the Dabba trade.

Those involved in the Dabba mode of futures trading find it financially attractive as they do not have to put in margin money or pay transaction fee to the exchanges. But they do not have any safeguards against default since the deals are without bona fide contracts.

This apart, since many of the brokers in the Dabba trade often hedge their personal risks through recognised brokers dealing on regular exchanges, the repercussions of defaults in Dabba trading can spill over to the valid futures trading as well.

Perhaps empowering the commodity futures regulator can help. It is, therefore, unfortunate that the process of amending the archaic Forward Contracts Regulation Act, 1952 for providing more teeth to the regulator, initiated two years ago, has not yet been taken to its logical end.

The Bill to amend this statute was not only drafted and formally approved by the Union Cabinet, but was also hurriedly enforced through an Ordinance in 2008. It aimed at converting the FMC into an autonomous, statutory regulator for commodity futures with full powers to act against unlawful practices and introduce futures trading in options, derivatives and intangibles like carbon credits. But, surprisingly, the Ordinance was allowed to lapse.

Unless this Bill is revived and enacted into law, it may be difficult to deal with Dabba trading. An amendment of the law is needed also to achieve the main objective of reintroducing futures trading in commodities.

Options trading in commodities will allow farmers to hedge their risks by giving them the right, but without any obligation, to sell their stocks at a future date. The government must take steps to this end and get the commodities regulator to put a lid on Dabba trading.